June 13, 2016

Brexit and the Globalization Trilemma

I have not written much on Brexit because I do not have a strong or particularly well-informed view of it. My personal hope is that Britain will choose to remain in the EU – but that is as much because of a belief that without Britain the EU will likely become less democratic and more wrong-headed as it is because of the likely economic costs of Brexit.

Yes, I do think exit poses significant economic risk to Britain (and possibly to the world economy), though I believe there are very large margins of uncertainty around the quantitative prognostications presented by the U.K. Treasury and many British economists. But there are also serious questions posed about the nature of democracy and self-government in the EU as presently constituted.

Ambrose Evans-Pritchard (AEP) has now written a remarkable piece that makes the political case for Brexit. AEP makes clear that he has little in common with the jingoistic and nativist tone of the Brexit campaign. The distortions and lies promoted by the Brexiteers aside, the referendum does raise a serious question about how Britain will be governed:

“Stripped of distractions, it comes down to an elemental choice: whether to restore the full self-government of this nation, or to continue living under a higher supranational regime, ruled by a European Council that we do not elect in any meaningful sense, and that the British people can never remove, even when it persists in error.

…

We are deciding whether to be guided by a Commission with quasi-executive powers that operates more like the priesthood of the 13th Century papacy than a modern civil service; and whether to submit to a European Court (ECJ) that claims sweeping supremacy, with no right of appeal.

It is whether you think the nation states of Europe are the only authentic fora of democracy, be it in this country, or Sweden, or the Netherlands, or France ….”

The trouble is that the EU is more of a technocracy than a democracy (AEP calls it a nomenklatura). An obvious alternative to Brexit would be to construct a full-fledged European democracy. AEP mentions Yanis Varoufakis, a Brexit opponent, who has argued for something like “a United States of Europe with a genuine parliament holding an elected president to account.” But as AEP says,

“I do not think this is remotely possible, or would be desirable if it were, but it is not on offer anyway. Six years into the eurozone crisis there is no a flicker of fiscal union: no eurobonds, no Hamiltonian redemption fund, no pooling of debt, and no budget transfers. The banking union belies its name. Germany and the creditor states have dug in their heels.”

The trilemma suggests democracy is compatible with deep economic integration only if democracy is appropriately transnationalized as well – the solution that Varoufakis favors. AEP, by contrast, believes a democratic and accountable European super-state is neither feasible, nor even desirable.

Note that the tension that arises between democracy and globalization is not straightforwardly a consequence of the fact that the latter constrains national sovereignty. There are ways in which external constraints – as with democratic delegation – can enhance rather than limit democracy. But there are also many circumstances under which external rules do not satisfy the conditions of democratic delegation. See the discussion here.

AEP believes that European rules clearly lie within the latter category. In addition to the European bureaucracy (and its treatment of the euro crisis), he is especially bothered by the broad authority the European Court of Justice (ECJ) has over national policies, without right to appeal. As for Britain’s opt-out: “Need I add too that Britain's opt-out from the Charter under Protocol 30 - described as "absolutely clear" by Tony Blair on the floor of the Commons - has since been swept aside by the ECJ.”

I do not have a clear view on the substance of AEP’s argument – as to whether Britain’s self-government is sufficiently impaired by the EU, or its opt-out has been nullified by the ECJ. But it is clear that the EU rules needed to underpin a single European market have extended significantly beyond what can be supported by democratic legitimacy. Whether Britain’s opt out remains effective or not, the political trilemma is at work. In AEP’s evocative language,

“The [European] Project bleeds the lifeblood of the national institutions, but fails to replace them with anything lovable or legitimate at a European level. It draws away charisma, and destroys it. This is how democracies die.”

I first thought of the globalization trilemma when I was asked to contribute to a special millennial issue of the Journal of Economic Perspectives (in 2000), where I was asked to speculate about the nature of the world economy in 100 years’ time. I presented it as the political analogue of the macroeconomic trilemma of the open-economy well known to economists (we can have at most two among monetary independence, free capital flows, currency pegs). I thought then, and still do, that it will increasingly shape the evolution of world’s political economy.

At the time, I viewed the EU as the only part of the world economy that could successfully combine hyperglobalization (“the single market”) with democracy through the creation of a European demos and polity. I expressed the same view, somewhat more cautiously, in my 2011 book The Globalization Paradox.

But I now have to admit that I was wrong in this view (or hope, perhaps). The manner in which Germany and Angela Merkel, in particular, reacted to the crisis in Greece and other indebted countries buried any chance of a democratic Europe. She might have presented the crisis as one of interdependence (“we all contributed to it, and we are all in it together”), using it as an opportunity to make a leap towards greater political union. Instead, she treated it as a morality play, pitting responsible northerners against lazy, profligate southerners, and to be dealt with by European technocrats accountable to no one serving up disastrous economic remedies.

As Brexit opponents keep reminding us, the economic costs of Britain’s departure could be indeed sizable. Reasonable people have to make up their own mind as to how those costs stack up against the damage to democratic self-government. EAP is fully aware that his choice entails taking a “calculated risk.”

My generation of Turks looked at the European Union as an example to emulate and a beacon of democracy. It saddens me greatly that it has now come to stand for a style of rule-making and governance so antithetical to democracy that even informed and reasonable observers like AEP view departure from it as the only option for repairing democracy.

Comments

«to be dealt with by European technocrats accountable to no one»

That's a particularly delirious hallucination, as all the decisions regarding the greek situation were taken solely by democratically elected heads of government in meetings in which the greek head of government fully participated.

To the point that they complained that they had to do all nighters because Tsipras was arguing every detail point.

The EU and Eurozone rules are both very clear indeed, which makes this delirious hallucination even more absurd: no taxing or spending decision can be made by «European technocrats accountable to no one», but solely by heads of government democratically accountable to their voters. Even finance ministers are excluded from decisions (and usually even from attending, never mind speaking, at meetings) on taxing and spending matters.

The delirious hallucination above is even more incomprehensible as in the matter of the greek bailout the polls indicated that a large majority of the 200-300 million eurozone voters wanted a much harsher offer to Greece than the one agreed democratically by the heads of government.

Also, such decisions are made as rule to unanimity: the offer to Greece was made by *all* the democratically elected heads of government of the eurozone, nobody abstained, and since it required unanimity, it was enacted because the democratically elected head of the greek government accepted it and did not veto it as it was their absolute right.

That agreed offer was then democratically voted upon and confirmed by several democratic parliamentary votes in Greece and other major countries. None of them liked it very much, but it was democratically approved by democratically elected heads of governments and their democratically elected parliamentary majorities in democratic and public votes.

Europe is falling apart because it had too little centralized governance, not too much of it.

Specifically, the EU needed a central body with the powers of Keynes's International Clearing Union. That body would have imposed stiff fines on Germany for running extremely large, and repeated year after year, current account surpluses. Indeed, if Germany had been recalcitrant, that body would have seized German surpluses.

To justify its actions, that body would have detailed Germany's large subsidies for its export firms and shown exactly how the Euro is de facto a German currency peg.

In this world, German and French banks would not have loaned so much so casually to the European periphery.

And Britain, no longer spooked by the extreme economic aggression of Germany, would not be fleeing from the great danger of a declining and hence dangerous EU.

Democracy IN ITS PRESENT FORM is incompatible with deep economic integration on a European scale and an experience of 'sovereignty' by 'the people' (not necessarily only on a national scale).
Decisions by heads of governments chosen in 'democratic' processes are not experienced as sufficiently democratic (and rightly so, because every layer of delegation reduces effective influence).
Representative democracy itself, even at a national level, is challenged by our increased possibilities to e-interact directly with increasing numbers of people, outmanoeuvring outdated hierarchical political structures.

So democracy has to be re-invented anyway, for Europe and on a European scale, but also nationally and in order to accommodate subnational (ethnic, language, cultural) tensions.
'Repairing democracy' as it was is no option any more.

We need a type of democracy that goes beyond counting votes.
It should focus on transparency of decision making processes in which arguments are weighed and on the possibility for every citizen to offer arguments as input for that process.
Not the number of votes, but the content and quality of voices should determine decisions.
Internet provides the means; face-to-face decision making needs to be and can easily be supplemented by it to facility the transparency and inclusivity of political decision making that is needed on all levels.

As an interested American I admittedly do not know some of the details that residents of the EU/Britain do. But I offer my perspective anyway.

As long as Germany, the Netherlands, and other member states take a punitive and moralistic stance towards its troubled cohorts like Greece, Spain, etc the EU cannot succeed. Rather than blame Greece, etc for its problems these other member states need to acknowledge how much they benefitted from loans and investments in Greece when times were good. Now the EU needs to help it change how it functions. Blaming, threatening, and punishing 'outsiders' is antithetical to a democratic union.

We face the same threats here in the USA in the form of Donald Trump, by the way. Heaven help us, and the rest of the world, if he wins the election in November.

Yes, representative democracy is due for a review. But let's not forget the failures of direct democracy either.

You says, "Not the number of votes, but the content and quality of voices should determine decisions."

Agreed, each vote has to be discounted by the "quality" it brings to the table. And yet, what determines the quality? Reputation in a social network? Teenagers will come ahead. Scholarly work published online? Those removed from the "common working men" often make ridiculous errors in judgement. Shall we institute a test to determine fitness to vote? You see where this is going.

Somehow the system needs to allow for direct and immediate input from the people, and yet correct for delusions of the mob.

The Brexit issue is really staying forever and it will be hard to see how things are going to recover, but there are many other things to look at in the present thing. I believe we have to be very well prepared and always work with right plans, if we do that then we have best chance as per achieving success is concern. I find it easier with broker like OctaFX which got tight spreads from 0.1 pips, over 70 instruments, stop out level of just 15% and daily news update, it’s perfect.

It's always funny to hear complaints about how the Greek crises was handled come from the UK -then without a doubt a power able to have its voice heard at the highest level and to face Germany on at least equal footing.
If the UK had thrown its weight and rallied then nations unhappy with Germany's line behind an alternative proposal, Greece's and the whole continent's history could have been very different.
And yet the ONLY voice I ever remember coming from London was that the Greece crisis was "Eurozone's mess" (as if UK banks didn't benefit from EU's capital mobility like everyone else!), and that the Euro members could solve it however they pleased as long as they didn't dare use a penny of British money.
Complaining about a result after being one of the few with the power to change it and choosing to not even try is the very height of hypocrisy.